United States

Holiday retail sales outlook

Look for composition of spending to show online surge

INSIGHT ARTICLE  | 

Without a doubt, U.S. households are on much firmer footing than at any time since 2007 just before the onset of the two-year Great Recession. Incomes increased more than 5 percent last year and that’s been followed by another year of solid growth in job gains, wages and salaries. While retail sales on a year-ago basis likely peaked in June at 6 percent, the condition of the household over the past three years has improved to the point that fears of a dour holiday spending season should be put to rest. 

Holiday retail sales will likely show a solid 3.4 percent overall gain to $647.3 billion this year, with spending per household increasing to $522. Online holiday shopping will likely increase 13 percent to $118 billion, up from $109 billion in 2015, which means there is some risk of a better rate of holiday spending than our forecast implies, especially in the online sales categories which continue to underestimate the true level of spending. For small and middle market businesses that have tapped into the online ecosystem that supports major retailers such as Amazon, Wal-Mart and Target, the holiday outlook appears to be strong.

While that overall increase is indeed a positive development, it’s the composition of spending to keep an eye on. This year that composition will likely feature a greater shift toward experiential, travel and services spending, as well as a steady increase toward online purchases, and that may present a challenge for middle market retailers.

Holiday shopping tailwinds

The composition of recent income gains in the economy favors the lower end of the spectrum; that is, the bottom-two quintiles of income earners who received a boost from policy changes organized around targeting minimum and livable wages and the Department of Labor’s new overtime rules that begin Dec. 1. While this will likely result in further margin pressure for the retail giants, it should, nonetheless, benefit the overall retail sales environment by boosting spending among the lower-two quintiles of income earners who have a higher marginal propensity to consume.

Meanwhile, data shows the upper-two quintiles of income earners, who disproportionately benefited from the early gains in the expansion, are for the first time since the previous business cycle tapping home equity lines of credit to fund overall outlays. This, in turn, should boost demand for luxury products, travel and accommodations.

Even so, with those income gains clustered in the large U.S. urban areas, and isolated at the upper and lower quintiles of income earners, those middle market retail-focused businesses that feed into the traditional mall culture of the suburbs and exurbs, and the independent retailers in rural areas that serve the middle class, may feel somewhat disconnected from this holiday season’s spending growth.  

One constant will be a further de-emphasis of the traditional Black Friday kickoff to the holiday shopping season. Due to the rise of online discounting, and growing variation in online options such as Urban Daddy’s perks sales operation which is competitive with Amazon on pricing, we think that the percentage of overall sales that take place before the Black Friday Nov. 25 start date may increase noticeably. Almost 40 percent of all holiday shopping begins around Oct. 31.  In our estimation, digital sales will drive both traditional and nontraditional holiday spending this season in such a way that outlays around the U.S. Thanksgiving holiday may appear weaker than they actually are.

Risks to the outlook

Risks around the holiday outlook are a bit more complex than they have been in past years. The U.S. economy’s inventory correction appears to be concluding. Retailers, as always, count on the bounce in holiday season spending to liquidate older inventories with early discounts, and then increased discounting later in the season to clear holiday supplies. However, the impending bankruptcy of the South Korean shipping firm, Hanjin, the seventh largest global shipping firm, may disrupt holiday outlays, especially computers and electronics or durables, such as refrigerators. To put this in perspective, Hanjin accounts for about 8 percent of all U.S. cargo.

If there is a lack of inventory in stores due to shipping issues, then that may alter the composition of spending for specific brands, hurting Samsung and Sony, especially. This may drive even more spending online at the expense of local and national retail chains.

Also clouding the outlook is the lingering uncertainty around the upcoming U.S. presidential election. Some households may choose to put off big ticket durable and nondurable spending until the policy environment becomes clearer, regardless of who wins the election. Consumers may very well choose to restrain their spending appetites despite recent data showing better consumer confidence and strong job and income gains this year. Recent data in both the Richmond Fed and Dallas Fed surveys on service sector spending point toward a modest pullback on big-ticket items. If that wariness carries over past the election, it has the potential to provide some downside risk to our otherwise optimistic outlook for the holiday spending season. 

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